Lurking in the Senate version of HR 4173 , the so-called Wall Street Reform and Consumer Protection Act of 2009, is a juicy chunk of pork for the global warming lobby: the commissioning of a “carbon markets” study to be conducted by an “interagency working group” that includes Chairs of the CFTC, SEC and FERC. Secretaries of Treasury and Agriculture plus heads of EPA, FTC and EIA round out the working group’s roster. Continue reading
Not Guilty! Congratulations to Ralph Cioffi and Matthew Tannin on their acquittal, Tuesday, on securities fraud charges. Responding, in June 2008, to pontification by the SEC on the arrests of Cioffi and Tannin (see video flashback, below)…
Apart from the eventual finding of guilt or innocence, the more I consider the FBI’s and SEC’s conduct in the arrests, the more I see it as a political show calculated not to enforce the law, but rather to satisfy the blood lust of investors and borrowers who should themselves be spanked for thinking they should be entitled to high returns (or sub-prime mortgages) without running high risks.
Ultimately, the prosecution of this case — which seems based almost entirely on e-mail traffic — will harm the markets more than help them by discouraging (a) expressions of optimism when times are tough and (b) candid give and take within firms. These, together, are essential to the functioning of financial markets. What would we think of a bank president who runs around Wall Street yelling at the top of his lungs that his bank’s cash balance is only a fraction of what it owes depositors?
We can thank this kind of prosecutorial overkill for banks’ current reluctance to make meaningful loans and for the reluctance of market players of various stripes to do what market players are supposed to do: take risks and speak optimistically about the future.
Congratulations, as well, to the Manhattan jury that so ably sniffed out this sham prosecution. Just imagine the outcome had Jeff Skilling been granted a change of venue to Manhattan. We can only hope that the U.S. Supreme Court will follow suit and unravel the absurdity of so-called “honest services fraud” by exonerating Mr. Skilling.
When a prominent Houston attorney advocates exonerating a convicted Enron executive you have to believe — as I have long argued — that something is seriously wrong with the conviction. In his excellent post, The Reeling Prosecution in the Skilling Case, Houston Attorney Tom Kirkendall explains why the U.S. Supreme Court should (and likely will) let Jeff Skilling out of jail when it hears his case.
For those with short attention spans, the bottom line is that Jeff Skilling was convicted and sent to jail for 24 years (a sentence recently set aside by the 5th Circuit Court of Appeals in a weirdly self-contradictory opinion) because a Houston jury, poisoned by months of anti-Skilling and anti-Enron propaganda, decided that Skilling exercised bad business judgment as Enron’s CEO during the company’s death spiral. The jury’s theory, doubtless buttressed by years of education and experience running companies in the complex energy derivatives markets, was apparently that any business executive dumb enough or nice enough to try to rescue the jobs and retirement plans of thousands of employees from a perfect market storm had damn-well better save the company or get ready for the guillotine.
Skilling’s conviction and sentence are shocking. Compelling evidence of Skilling’s innocence (and the prosecution’s guilt) is provided by his 209-page Petition for Writ of Certiorari.
One prong of Skilling’s defense is that “honest services wire fraud,” codified at 8 U.S.C. § 1346, is chaotic nonsense that fosters politically-motivated witch hunts any time a big company’s stock plunges in value for whatever reason. Kirkendall notes: Continue reading
With Wall Street agog over the DOJ’s biggest insider-trading sting ever and fully seven years since the Enron scandal broke, Jeff Skilling is back in the news. The U.S. Supreme Court has agreed to hear Skilling’s appeal of his convictions in the Enron case for so-called “honest services fraud” and insider trading. Needless to say, justice in these United States can take an excruciatingly long time to develop.
The Supreme Court’s grant of certiorari in Skilling v. United States should be good news for Americans accused of white collar fraud in the current wave of anti-Wall Street hysteria. It is a sign that justice may at long last get its day in court, even in politically-charged cases like Skilling’s which grew out of the collapse of Enron. I have consistently argued — see Jeff Skilling Is Innocent — that Skilling’s convictions were themselves a fraud, riddled with prosecutorial misconduct and jury bias and founded on a specious legal theory, “honest services fraud,” that criminalizes optimism essential to economic growth.
Here, for the record, are the questions to be heard by the Supreme Court:
1. Whether the federal “honest services” fraud statute, 18 U.S.C. § 1346, requires the government to prove that the defendant’s conduct was intended to achieve “private gain” rather than to advance the employer’s interests, and, if not, whether § 1346 is unconstitutionally vague.
2. When a presumption of jury prejudice arises because of the widespread community impact of the defendant’s alleged conduct and massive, inflammatory pretrial publicity, whether the government may rebut the presumption of prejudice, and, if so, whether the government must prove beyond a reasonable doubt that no juror was actually prejudiced.
Not every economic catastrophe is caused by a crime. Markets naturally move up and down in cycles. Prosecutors and politicians should have the courage to make this clear to investors who too often expect someone else to pay every time the market turns against them.
Earlier this year, I shared misgivings of other commentators that Mary Schapiro’s tenure at FINRA rendered her too conflicted to Chair the SEC. Judge Rakoff’s scathing September 14 order in SEC v. Bank of America adds weight to the argument. Judge Rakoff rejected the SEC’s settlement, ordering the parties to prepare for trial on February 1. Continue reading
Who ruined your retirement portfolio? In his September 10, 2009 New York Times’ column, Accountants Misled Us Into Crisis , Floyd Norris points the finger at standard-setting accountants at the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).
Norris appears convinced that if the FASB and IASB had written the “right” accounting standards the “right” way (especially to require banks to report their assets at “fair” value), banks could not have become so weak as to threaten the financial system. If only reality were that simple. Four factors argue against Norris’ view. Continue reading
For an eloquent illustration of how accounting innovations like FAS 157’s “fair value” regime are way beyond even above-average American financial readers, try Michael Rapoport’s May 1, 2009 article entitled
New FASB Rule Aims to Clarify ‘Net Income’.
Rapoport, trying to capture the meaning of the new SFAS No. 160, stumbles over one of the most basic concepts in the accounting literature — that “minority interests” in consolidated financial statements reflect the fact that “parent” companies don’t really “own” 100 percent of the assets or income of “subsidiaries” except those they wholly own. Continue reading
Today, in congressional action sure to give every internal auditor and financial analyst recurring nightmares, members of the U.S. House Capital Markets Subcommittee demanded that the Financial Accounting Standards Board (FASB) demonstrate greater flexibility and speed in changing market-to-market (or “fair value”) accounting rules in the face of today’s financial industry crisis, or else. Much of the commentary came across as a congressional call for an IASB-like principles approach in place of the FASB’s detailed rules-based approach.
House Financial Services Committee Chair Barney Frank (D-Mass) and Capital Markets Subcommittee Chair Paul Kanjorski (D-Pa), each in his own way, stated that mark-to-market accounting must be applied differently to different companies and industries based on their respective circumstances that changed must happen now, not later after more “academic” study. In his opening statement, Kanjorski declared:
Raising start-up capital is a tough job even in good economic times. These days, with credit so scarce, it can seem nearly impossible. Unfortunately, when entrepreneurs want to get things done “in the worst way,” they sometimes run out of patience and do just that. Raising capital in 21st century America is a bit like taking a road trip across Iraq. The road is strewn with booby traps. Continue reading
Yesterday, the SEC announced that KBR and Halliburton have settled their Foreign Corrupt Practices Act case with the SEC and Department of Justice for total fines and disgorgement of $579 million. The underlying bribes apparently totalled far less: a mere $5 million paid to a Nigerian political party for a train contract.
At this point, a voice inside my head keeps screaming, “What about Madoff?!” The FCPA violation alleged here is essentially a victimless crime, functionally a penny-ante “bailout” of a few Nigerians that actually helped the companies’ shareholders. Yet, this SEC complaint is undersigned by no fewer than six SEC attorneys who, judging from the factual timeline, were busily engaged on this case — together with uncounted DOJ counterparts — over at least the past five years while Bernie Madoff made off with $30-50 billion belonging to investors. Continue reading